Philippine Markets Newsletter

This newly listed banking arm affiliate of San Miguel will upgrade its ATM network, also JFC tearsheet

August 25, 2023

The banking arm of conglomerate San Miguel Corp. has boosted its lending portfolio after securing its universal bank license. Following the change of its status, more local businesses will be supported particularly the small and medium enterprises. 

Bank of Commerce through its universal bank license will be offering a broader range of financial solutions to its clients that can drive the economy’s growth. In addition, proceeds from its initial public offering will be used to upgrade its ATM network.

Today, we look at one of the institution’s unit investment trust funds (UITF). On top of examining the fund’s portfolio, we will provide you with the current Uniform Accounting Performance and Valuation Tearsheet for one of the fund’s largest holdings.  

Philippine Markets Newsletter:
Friday Uniform Portfolio Analytics
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The Bank of Commerce has recently announced plans to upgrade its existing Automated Teller Machine (ATM) network. The 5-year IT Investment and digitization program initiative is in line with the bank’s commitment to enhance the banking experience of its valued clients. The bank acknowledges that ATMs form a critical touchpoint for customers, and by upgrading the machines, they aim to facilitate smoother and more efficient transactions for users.

As part of this initiative, the Bank of Commerce intends to replace older ATMs across Metro Manila, and then in various parts of the country with more advanced and user-friendly models. 

The new ATMs will have a user-friendly touchscreen interface that simplifies the banking process, enabling customers to conveniently perform various transactions such as withdrawals, balance inquiries, and fund transfers, among others. 

Given this latest project as part of their IT investments, let’s also take a look at the bank’s other products, specifically a UITF it offers to its clients.

The Bank of Commerce Diversity Dividend Focused Fund launched on April 8, 2015, is a Unit Investment Trust Fund (UITF) that aims to achieve for its participants long-term capital growth and dividend income generation by investing in equity securities listed in the Philippine Stock Exchange (PSEi).

The fund is suited for investors seeking higher returns from stock market investments but with a long-term time horizon and aggressive risk profile.

  • At its inception in April 2015, Bank of Commerce Diversity Dividend Focused Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. It had a relatively neutral position until January 2016 when it dipped by 20% to PHP 0.80 because of the sudden decline in oil prices. During the period, the PSEi underperformed the fund with a loss of 20%.

  • In August 2016, the fund almost returned to its beginning NAVPU after it reached PHP 0.98. Its 23% increase underperformed its benchmark’s gain of 28%. Before the year ended, the fund’s NAVPU dipped again by 15% to PHP 0.83 in December 2016, which outperformed the PSEi’s decrease of 19% during this period. This loss is evident across other Asian stocks as US equities and oil prices continue to fall.

  • The NAVPU slowly recovered by January 2018 to its beginning NAVPU of PHP 1.00, a gain of 20% that underperformed its benchmark’s increase of 38%.

  • The fund saw a decline in the succeeding months, reaching another low of PHP 0.77 in November 2018. This 23% decline is attributed to the worries regarding the BSP’s policy rate changes, the broad selloff of US stocks, and the impending Brexit. The fund outperformed the PSEi’s incurred a loss of 24% in this period.

  • In March 2020, the fund’s NAVPU dropped to its lowest point at PHP 0.53 following the massive market selloff caused by the COVID-19 pandemic. However, this 31% decline versus its 2019 year-end NAVPU outperformed its benchmark’s loss of 41%.

  • The fund has slowly recovered from its decline with a NAVPU of PHP 0.61 in May 2020. This 15% gain underperformed its benchmark’s gain of 22%. This climb continued in April 2022 by 19% while outperformed by PSEi’s 26% climb.

  • After around six months, the fund shrunk by 17% or at PHP 0.59 due to the peso falling to a new all-time low of 59:$1 before closing at P59.99 due to mounting inflation and recession risks. 

  • Since its inception, the Bank of Commerce Diversity Dividend Focused Fund has had a cumulative loss of 35% versus PSEi’s cumulative loss of 23% during the same period.

With the fund underperforming its benchmark, let’s take a look at the quality of the companies in its holdings. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that don’t appear to break even. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top seven core non-financial holdings of Diversity Dividend Focused Fund along with its Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most of the companies in Diversity Dividend Focused Fund show as-reported ROAs below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 3%, below the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered a Uniform ROA of 6%, a profitability above the global corporate average.

The Uniform Accounting framework addresses financial statement inconsistencies attributable to the flaws present in the Philippine Financial Reporting Standards (PFRS). This enables investors to determine the true underlying performance of companies and avoid distorted financial analysis and valuation.

As such, it should not be surprising that when analyzing the non-financial holdings of Diversity Dividend Focused Fund, the figures that easily stand out are the large discrepancies between Uniform ROA and as-reported ROA for these companies.

While at a glance, the difference between as-reported ROA and Uniform ROA may not seem that great, the distortion in percentage ranges from -11% to 375%, with PLDT Inc. (TEL:PHL), Jollibee Foods Corporation (JFC:PHL) and Ayala Corporation (AC:PHL) having the highest positive distortions.

Among these holdings, Globe Telecom, Inc. (GLO:PHL) and Petron Corporation (PCOR:PHL) is in line with as-reported ROA, presenting a potential cause for concern. Companies such as this need to be closely monitored for drastic changes that could negatively affect the fund itself, especially when the support behind the stocks’ performance begins to wane.

As-reported metrics understate the profitability of PLDT, Inc., suggesting an as-reported ROA of 1%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 6% above the average cost of capital. In addition, the company has consistently generated returns of at least 2% over the past decade.

Similarly, as-reported metrics understate the profitability of Jollibee Foods Corporation with an as-reported ROA of 3%. In fact, its Uniform ROA is at 9%, when its lowest was 5% over the past decade except in 2020.

Likewise, as-reported metrics understate the profitability of Ayala Corporation, suggesting a below-average firm with an as-reported ROA of only 3% when this company actually has a 7% Uniform ROA.

By focusing on as-reported metrics alone, these companies look like anything but profitable businesses.

That said, looking at profitability alone is insufficient to deliver superior investment returns. Investors should also identify if the market is significantly undervaluing a company’s earnings growth potential.

This table shows the earnings growth expectations for the major non-financial holdings of the fund. It features three key data points:

  1. The two-year Uniform earnings per share (EPS) growth represents the Uniform earnings growth the company is likely to have for the next two years. The earnings number used is the value when we convert consensus sell-side analyst estimates according to the Uniform Accounting framework.

  2. The market expected Uniform EPS growth represents what the market thinks Uniform earnings growth is going to be for the next two years. Here, we show how much the company needs to grow Uniform earnings in the next two years to justify the current stock price of the company. This is the market’s embedded expectations for Uniform earnings growth.

  3. The Uniform EPS growth spread is the difference between the two-year Uniform EPS growth and market expected Uniform EPS growth.

On average, Philippine companies are expected to have 5%-6% annual Uniform earnings growth over the next two years. Meanwhile, Diversity Dividend Focused Fund’s major holdings are forecasted to significantly outperform with a 29% projected Uniform earnings growth in the next two years, while the market is forecasting 4% Uniform earnings.

Most of the companies in Diversity Dividend Focused Fund have positive Uniform earnings growth. Among these companies, Jollibee Foods Corporation and Ayala Corporation (AC:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing Jollibee Foods Corporation’s Uniform earnings to grow by 29% in the next two years, while sell-side analysts are projecting 122% growth for the company’s earnings.

Moreover, the market is pricing Ayala Corporation’s Uniform earnings to shrink by 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 84%.

Overall, as-reported numbers significantly understate the expected earnings of these companies, as shown by the Uniform-adjusted sell-side estimates.

Uniform Accounting metrics show that these mature but high-growth and high-return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Jollibee Foods Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the Diversity Dividend Focused Fund, Jollibee Foods Corporation (JFC:PHL).

As the Uniform Accounting tearsheet for Jollibee Foods Corporation highlights, the company trades at a Uniform P/E of 39.1x, which is above the global corporate average of 18.4x but below its historical average of 59.8x.

High P/Es require high EPS growth to sustain them. In the case of Jollibee Foods Corporation, the company showed a 192% Uniform EPS growth last year.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp of near-term financial forecasts like revenue and earnings.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings as a starting point for our Uniform earnings forecasts. When we do this, Jollibee Foods Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 237% and 46% in 2023 and 2024, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Jollibee Foods Corporation’s PHP 249 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power 2x the long-run corporate averages. Moreover, its cash flows and cash on hand fall short of its obligations within five years, and it also has an intrinsic credit risk of 250bps. Together, these indicate a high dividend risk and moderate credit risk.

Lastly, Jollibee Foods Corporation’s Uniform earnings growth is above peer averages and above peer average valuations.

About the Philippine Markets Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living often rely on professionals to manage their own investments within the scope of their investment policies.

With so many funds and managers out there, it can get confusing and difficult to decide which one best suits your needs as an investor.

Every Friday at the end of the month, we focus on one fund in the Philippines and take a deeper look into their current holdings. Using Uniform Accounting, we identify the high-quality stocks in their portfolio which may not be obvious using the as-reported numbers.

We also identify which holdings may be problematic for the fund’s returns that they would need to reconsider from a UAFRS perspective.

To wrap up the fund analysis, we highlight one of their largest holdings and focus on key metrics to watch out for, accessible in our tearsheets.

Hope you’ve found this week’s focus on the Bank of Commerce Diversity Dividend Focused Fund interesting and insightful.

Stay tuned for next month’s Friday Uniform Portfolio Analytics!


Angelica Lim
Research Director
Philippine Markets Daily
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